The Wachovia Tug of War

Discussing the claim of tortious interference with contract recently in class I noted the difficulty plaintiffs face in persuading a court that a defendant’s conduct crossed the line between tough but legitimate competition and unlawful interference.  I used to spend time on it in class–when I taught at Babson I employed Pennzoil v Texaco as fodder for moot court–but weaned it from discussion because after Pennzoil v Texaco the case law got pretty thin.

That may change if the Wachovia litigation has legs.  Last Monday Citigroup announced it would buy Wachovia for $2.2 billion, or about $1/share, in a deal backed by the federal government in the face of Wachovia’s imminent collapse.  On Friday Wells Fargo announced that it would buy Wachovia for $15 billion, or orver $7/share.  Citigroup cried “foul,” claiming the FDIC encouraged Wells Fargo’s bid after helping broker Citigroup’s deal days earlier.  Over the weekend Citigroup sought a court order enjoining the Wells Fargo deal, which Wachovia and Wells Fargo opposed.  The parties raced between New York state court (in the person of a state trial court judge who heard arguments from his country home in Connecticut), the New York federal district court, and the New York Court of Appeals in inconclusive attempts to trump each others tactics, agreeing today to put all litigation on hold until Wednesday while they try to negotiate a resolution.  It’s a high-stakes legal contest involving some of the country’s top litigators duking it out against the background of the most turbulent financial markets in over 70 years.

6 thoughts on “The Wachovia Tug of War”

  1. I talked about the same thing with my roommate Ishar before you posted this. I certainly felt that Wells Fargo would be guilty of tortious interference, given that a pretty clear deal was already struck out with Citigroup, who had all the intent and made decisions to the acquisition based on federal backing.

    Though I must say I’m surprised that the FDIC encouraged the second deal with Wells Fargo… Could Citigroup also sue the government agency for anything?

  2. It will be interesting to see how this proceeds and what sort of impact this has on he FDIC’s future stance on supporting takever bids. The question really is, who is truly at fault? If the FDIC actually encouraged Wachovia to consider the Wells Fargo offer it seems that the FDIC in fact instigated this entire conflcit, however, the FDIC is essentially immune to any litigtion of course, and Wells Fargo is faced with dealing with the legal confrontation. Is the FDIC suddenly going to start acting as a pseudo-auctioneer rather than essentially a broker?

    The idea of dividing Wachovia by region seems to provide a weak solution. How would it be divided? Who gets priority, Citigroup who made the original offer or Wells Fargo the high-bidder? This seems like an unnecessary mess. Also, I believe that the true compromise would be to block Wells Fargo from proceeding with negotiations if Citigroup would raise its offer to 3-5 dollars a share, the FDIC/The Fed could negotiate this as it appears to have no trouble acting as a supporting force in these kind of negotiations (Ex. Bear Stearns and JP Morgan). While dividing it may seem like a necessary compromise, the Pennzoil v. Texaco case would suggest that Citigroup ought to retain the rights to the deal.

    If the FDIC pulls the plug on the original deal it will lose all credibility in brokering these deals to save the financial system, and inadvertantly hinder its ability to “save” the financial system. Yet another source of uncertainty will be injected into the financial markets and into prospective buyers of any future failing banks and making it more likely of another Lehman situation than another WaMu, Merrill or Wachovia.

  3. I have a pretty evil idea of this case. What if Well Fargo estimated that this case would ended up with a compromise between them and Citi. It is a special time period for the US, a few-year-long lawsuit to settle this case would be useless to save WaMu. Thus, all the parties just want a fast result. Either splitting WaMu or lowering down the purchase price would benefit Wells Fargo. Or at least Citi would raise the price to acquire WaMu, which satisfies the evil mind of Wells Fargo.

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